Final answer:
The loan origination fee of one point increases the APR relative to the nominal interest rate, since the APR reflects all costs of borrowing including upfront fees. In an ARM, while the lender is protected against inflation, the origination fee still impacts the APR. Moreover, ARMs have interest rates that adjust with inflation, which could lead to higher future payments for the borrower.
Step-by-step explanation:
When a lender charges a loan origination fee of one point to make a mortgage loan, it typically means that the fee will increase the Annual Percentage Rate (APR) relative to the nominal interest rate because upfront fees such as origination points are taken into account when calculating the APR. The nominal interest rate is the base rate that the lender charges for borrowing the money. However, the APR includes the nominal interest rate and any additional costs, such as the origination point, and is a more comprehensive measure of the cost of borrowing.
In an adjustable-rate mortgage (ARM), while initial nominal rates may be lower due to the lender's protection against inflation risks, the origination point still affects the APR. Borrowers must be aware that the initial savings from a lower nominal rate on an ARM may be offset by increases in the interest rate tied to inflation adjustments, which could substantially increase their future payments.
If inflation rises, the interest rates on ARMs can also rise, meaning the nominal rate would go up by two percentage points if inflation went up by the same amount. This is because the interest rates on ARMs are designed to adjust with fluctuations in inflation, protecting lenders against the loss of real value in loan repayments. Hence, the initial lower risk premium may be neutralized by such adjustments.